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You've Taught Your Kids About Money...
But Do They Know About Credit? |
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Teaching our children about money is one of the most important lessons parents impart. A
clear understanding of the value of money and how to handle it responsibly prepares
children to function in the world as workers, consumers, family members, and citizens.
But just because your kids understand money, you can't be sure they understand
credit unless you teach them about it specifically.
Consider this: at college campuses nationwide students are offered credit cards
even if they do not work. And while a credit card can be a valuable resource for
a student, available for emergencies and building a young person's credit history,
it can also mean big trouble for a teenager who doesn't yet understand the workings
of credit. Last year, the average undergraduate carried a balance of over $2000.
You Can Start Earlier Than You Think
Many parents begin teaching kids about money--cash specifically--when the children start to
understand the concepts of addition and subtraction. Then kids can start thinking
through and participating in transactions, subtracting the cost of those baseball
cards from their weekly allowance, for example.
Once children understand multiplication, they can be taught about interest and you
can begin introducing and explaining the concept of credit.
Even more important, you can bring home the concept by allowing your child to
experience it. When your child asks for an advance on her allowance to buy a
new toy, instead of simply granting or denying it, explain that she has two
choices. She can either save her allowance until she has the $10 she needs to
buy the toy, or she can borrow the extra money she needs and then pay it back--plus
interest. Make sure she understands that the toy costs more if she chooses credit.
Of course, this is also the time to teach kids about the interest they can earn
if they "lend" the bank their cash by putting it in a savings account. To
demonstrate this principle, you might offer your child interest payments if
he chooses to deposit his allowance with you while saving up rather than taking
the credit option.
Give Your Teen Practice with Credit
By the time your child reaches high school, both you and she may be ready for more
real-world practice with credit. You can give her experience with carrying and
using plastic by obtaining an authorized user's card for her on your credit
account. She'll get a card with her name on it, but you'll get the bills
(and the responsibility).
Before giving your teenager a card on your account, be sure that clear guidelines
for use and payment responsibility are in place. This card shouldn't equal
unlimited access to your hard-earned money. Rather, it is an opportunity for
your child to try his hand at paying with plastic and then paying the bill. If
he overspends, don't forgive the debt--repaying it and interest through regular
payments (either directly to the card or to you) is another real world experience.
Encourage Your Credit-Smart Teen to Build a Credit History
By the time your credit-educated teenager reaches college and the credit offers come
pouring in, she should know enough to choose a card with good terms, like a low
annual percentage rate and no annual fee, and then use it wisely.
With luck, his experience with credit will have removed the glamour of "free"
money, and he will be able to use his credit card to build an asset for the
future: a solid credit history that will help him obtain car loans, favorable
interest rates, and eventually a mortgage.
The final credit lesson your kids need to learn is that their credit is a kind of
possession, and one that they should treat with care. Explain the credit reporting
industry, and the importance of checking credit reports so that your children
understand the long-term benefits of responsible management of all aspects of
their credit.
With your help, your children can enter the adult world fully prepared to become
smart, savvy credit-active consumers--an advantage they'll appreciate every time a
college buddy complains about all those credit card bills!
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